Chapter 7 · Liabilities 171 Compliance with international standards FRS 12 was developed jointly with the international standard on the same topic, IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Hence, all the requirements of the IAS are included in the FRS and there are no differences of substance between their common requirements. The FRS also deals with the circumstances under which an asset should be recognised when a provision is recognised and gives more guidance than the IAS on the dis- count rate to be used in the present value calculation. Summary In this chapter, we have introduced the subject of accounting for liabilities and have noted that this is an area where the theoretical debate is only just beginning. We have examined the definition of a liability and explored the recognition and measure- ment of liabilities. We have then explored the treatment of provisions and have explained the approach of the ASB, designed particularly to stop abuses that involved the making of excessive provisions. Finally, we have discussed the nature and treatment of contingent lia- bilities and assets. FRS 12 and IAS 37 were both issued in 1998 and were drafted in accordance with the same principles. Hence this is one of the relatively few areas where there is already conver- gence between the UK and international standards. Recommended reading W.T. Baxter Accounting values and inflation, McGraw-Hill, Maidenhead, 1975. IATA (in association with KPMG), Frequent flyer programme accounting, IATA, Montreal, 1995. ‘Revenue recognition’ Company Reporting No. 142, April 2000. P. Weetman, Assets and liabilities: Their definition and recognition, Certified Accountants Publications Limited, London, 1988. Excellent up-to-date and detailed reading on the subject matter of this chapter and on much of the contents of this book is provided by the most recent edition of: UK and International GAAP, A. Wilson, M. Davies, M. Curtis and G. Wilkinson-Riddle (eds), Ernst & Young, Butterworths Tolley, London. At the time of writing the most recent edition is the 7th, published 2001. Questions 7.1 Provisions are particular kinds of liabilities. It therefore follows that provisions should be recognised when the definition of a liability has been met. The key requirement of a liability is a present obligation and thus this requirement is critical also in the context of the recogni- tion of a provision. However, although accounting for provisions is an important topic for standard setters, it is only recently that guidance has been issued on provisioning in financial 172 Part 2 · Financial reporting in practice statements. In the UK, the Accounting Standards Board has recently issued FRS 12 Provisions, Contingent Liabilities and Contingent Assets. Required: (a) (i) Explain why there was a need for more detailed guidance on accounting for provi- sions in the UK. (7 marks) (ii) Explain the circumstances under which a provision should be recognised in the financial statements according to FRS 12: Provisions, Contingent Liabilities and Contingent Assets. (6 marks) (b) Discuss whether the following provisions have been accounted for correctly under FRS 12: ‘Provisions, Contingent Liabilities and Contingent Assets’. World Wide Nuclear Fuels plc disclosed the following information in its financial state- ments for the year ending 30 November 1999: Provisions and long-term commitments (i) Provision for decommissioning the Group’s radioactive facilities is made over their useful life and covers complete demolition of the facility within fifty years of it being taken out of service together with any associated waste disposal. The provision is based on future prices and is discounted using a current market rate of interest. Provision for decommissioning costs £m Balance at 1.12.98 675 Adjustment arising from change in price levels charged to reserves 33 Charged in the year to proft and loss account 125 Adjustment due to change in knowledge (charged to reserves) 27 –––– Balance at 30.11.99 860 –––– There are still decommissioning costs of £1231m (undiscounted) to be provided for in respect of the group’s radioactive facilities as the company’s policy is to build up the required provision over the life of the facility Assume that adjustments to the provision due to change in knowledge about the accu- racy of the provision do not give rise to future economic benefits. (7 marks) (ii) The company purchased an oil company during the year. As part of the sale agreement, oil has to be supplied for a five year period to the company’s former holding company at an uneconomic rate. As a result a provision for future operating losses has been set up of £135m which relates solely to the uneconomic supply of oil. Additionally the oil com- pany is exposed to environmental liabilities arising out of its past obligations, principally in respect of remedial work to soil and ground water systems, although currently there is no legal obligation to carry out the work. Liabilities for environmental costs are provided for when the Group determines a formal plan of action on the closure of an inactive site and when expenditure on remedial work is probable and the cost can be measured with reasonable certainty. However in this case, it has been decided to provide for £120m in respect of the environmental liability on the acquisition of the oil company. World Wide Nuclear Fuels has a reputation for ensuring that the environment is preserved and pro- tected from the effects of its business activities. (5 marks) ACCA, Financial Reporting Environment (UK Stream), December 1999 (25 marks) Chapter 7 · Liabilities 173 7.2 FRS 12 – Provisions, contingent liabilities and contingent assets was issued in September 1998. Prior to its publication, there was no UK Accounting Standard that dealt with the general subject of accounting for provisions. Extract plc prepares its financial statements to 31 December each year. During the years ended 31 December 2000 and 31 December 2001, the following event occurred: Extract plc is involved in extracting minerals in a number of different countries. The process typically involves some contamination of the site from which the minerals are extracted. Extract plc makes good this contamination only where legally required to do so by legislation passed in the relevant country. The company has been extracting minerals in Copperland since January 1998 and expects its site to produce output until 31 December 2005. On 23 December 2000, it came to the attention of the directors of Extract plc that the government of Copperland was virtually certain to pass legislation requiring the making good of mineral extraction sites. The legislation was duly passed on 15 March 2001. The directors of Extract plc estimate that the cost of making good the site in Copperland will be £2 million. This estimate is of the actual cash expenditure that will be incurred on 31 December 2005. Required (a) Explain why there was a need for an Accounting Standard dealing with provisions, and summarise the criteria that need to be satisfied before a provision is recognised. (10 marks) (b) Compute the effect of the estimated cost of making good the site on the financial state- ments of Extract plc for BOTH of the years ended 31 December 2000 and 2001. Give full explanations of the figures you compute. The annual discount rate to be used in any relevant calculations is 10%. (10 marks) CIMA, Financial Reporting – UK Accounting Standards, May 2001 (20 marks) 7.3 FRS 12 – Provisions, Contingent Liabilities and Contingent Assets requires contingencies to be classified as remote, possible, probable and virtually certain. Each of these categories should then be treated differently, depending on whether it is an asset or a liability. Required (a) Explain why FRS 12 classifies contingencies in this manner. (5 marks) The Chief Accountant of Z plc, a construction company, is finalising the work on the finan- cial statements for the year ended 31 October 2002. She has prepared a list of all of the matters that might require some adjustment or disclosure under the requirements of FRS 12. (i) A customer has lodged a claim against Z plc for repairs to an office block built by the company. The roof leaks and it appears that this is due to negligence in construction. Z plc is negotiating with the customer and will probably have to pay for repairs that will cost approximately £100000. (ii) The roof in (i) above was installed by a subcontractor employed by Z plc. Z plc’s lawyers are confident that the company would have a strong claim to recover the whole of any costs from the subcontractor. The Chief Accountant has obtained the subcon- tractor’s latest financial statements. The subcontractor appears to be almost insolvent with few assets. (iii) Whenever Z plc finishes a project, it gives customers a period of three months to notify any construction defects. These are repaired immediately. The balance sheet at 31 October 2001 carried a provision of £80 000 for future repairs. The estimated cost of repairs to completed contracts as at 31 October 2002 is £120000. 174 Part 2 · Financial reporting in practice (iv) During the year ended 31 October 2002, Z plc lodged a claim against a large firm of electrical engineers which had delayed the completion of a contract. The engineering company’s Directors have agreed in principle to pay Z plc £30 000 compensation. Z plc’s Chief Accountant is confident that this amount will be received before the end of December 2002. (v) An architect has lodged a claim against Z plc for the loss of a laptop computer during a site visit. He alleges that the company did not take sufficient care to secure the site office and that this led to the computer being stolen while he inspected the project. He is claiming for consequential losses of £90 000 for the value of the vital files that were on the computer. Z plc’s lawyers have indicated that the company might have to pay a triv- ial sum in compensation for the computer hardware. There is almost no likelihood that the courts would award damages for the lost files because the architect should have copied them. Required (b) Explain how each of the contingencies (i) to (v) above should be accounted for. Assume that all amounts stated are material. (3 marks for each of (i) to (v) = 15 marks) CIMA, Financial Accounting – UK Accounting Standards, November 2002 (20 marks) 7.4 L plc sells gaming cards to retailers, who then resell them to the general public. Customers who buy these cards scratch off a panel to reveal whether they have won a cash prize. There are several different ranges of cards, each of which offers a different range of prizes. Prize-winners send their winning cards to L plc and are paid by cheque. If the prize is major, then the prize-winner is required to telephone L plc to register the claim and then send the winning card to a special address for separate handling. All cards are printed and packaged under conditions of high security. Special printing techniques make it easy for L plc to identify forged claims and it is unusual for customers to make false claims. Large claims are, however, checked using a special chemical process that takes several days to take effect. The directors are currently finalising their financial statements for the year ended 31 March 2002. They are unsure about how to deal with the following items: (i) A packaging error on a batch of ‘Chance’ cards meant that there were too many major prize cards in several boxes. L plc recalled the batch from retailers, but was too late to prevent many of the defective cards being sold. The company is being flooded with claims. L plc’s lawyers have advised that the claims are valid and must be paid. It has proved impossible to determine the likely level of claims that will be made in respect of this error because it will take several weeks to establish the success of the recall and the number of defective cards. (ii) A prize-winner has registered a claim for a £200 000 prize from a ‘Lotto’ card. The financial statements will be finalised before the card can be processed and checked. (iii) A claim has been received for £100 000 from a ‘Winner’ card. The maximum prize offered for this game is £90 000 and so the most likely explanation is that the card has been forged. The police are investigating the claim, but this will not be resolved before the financial statements are finalised. Once the police investigation has concluded, L plc will make a final check to ensure that the card is not the result of a printing error. (iv) The company received claims totalling £300000 during the year from a batch of bogus ‘Happy’ cards that had been forged by a retailer in Newtown. The police have prosec- uted the retailer and he has recently been sent to prison. The directors of L plc have decided to pay customers who bought these cards 50% of the amount claimed as a goodwill gesture. They have not, however, informed the lucky prize-winners of this yet. Chapter 7 · Liabilities 175 Required (a) Identify the appropriate accounting treatment of each of the claims against L plc in respect of (i) to (iv) above. Your answer should have due regard to the requirements of FRS 12, Provisions, contingent liabilities and contingent assets. (3 marks for each of items (i) to (iv) = 12 marks) (b) It has been suggested that readers of financial statements do not always pay sufficient attention to contingent liabilities even though they may have serious implications for the future of the company. (i) Explain why insufficient attention might be paid to contingent liabilities.(4 marks) (ii) Explain how FRS 12 prevents companies from treating as contingent liabilities those liabilities that should be recognised in the balance sheet. (4 marks) CIMA, Financial Accounting – UK Accounting Standards, May 2002 (20 marks) In this chapter we deal with capital instruments and the broader category of financial instru- ments, including derivatives, as well as hedge accounting. This is currently an area of much flux and uncertainty. Standard setters are only now coming to grips with the vexed subjects of derivatives and hedge accounting but perhaps the major cause of uncertainty is the impact of the convergence programme. The relevant International Standards, IAS 32 and 39, are still evolving while the UK standards are also being reviewed. The relevant UK Exposure Draft, FRED 30, is itself tentative in some places in referring to the need to await the com- pletion of developments in the international standard-setting arena while some of its proposed changes depend on changes being made to UK company law. The UK statements covered in this chapter are: ● FRS 4 Capital Instruments (1993) ● FRED 23 Financial Instruments: Hedge Accounting (2002) ● FRS 13 Derivatives and other Financial Instruments: Disclosure (1998) ● FRED 30 Financial Instruments: Disclosure and Presentation and Financial Instruments: Recognition and Measurement (2002) The international standards to which we refer are: ● IAS 32 Financial Instruments: Disclosure and Presentation (revised 1998) ● IAS 39 Financial Instruments: Recognition and Measurement (revised 2000) Both were in the process of revision as at January 2003. Introduction A financial instrument can involve very simple things like cash, or something far more com- plicated, such as a derivative. At this stage it might be useful to introduce the definition of a financial instrument as set out in FRED 30 Financial Instruments: Disclosure and Presentation, 1 which is itself derived from IAS 32. A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. A financial asset is any asset that is: a) Cash; b) A contractual right to receive cash or another financial asset from another entity; Financial instruments chapter 8 overview 1 FRED 30, Para. 5, p. 32. Chapter 8 · Financial instruments 177 c) A contractual right to exchange financial instruments with another entity under condi- tions that are potentially favourable; or d) An equity instrument of another entity. A financial liability is any liability that is a contractual obligation: a) To deliver cash or another financial asset to another entity; or b) To exchange financial instruments with another entity under conditions that are poten- tially unfavourable. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. This is not an easy definition to understand and one always knows that there are problems when, as is the case with financial assets, the definition of a term includes the term itself. It is perhaps helpful to realise that the definition excludes physical assets and the obligations to provide services in the future. We will in this chapter concentrate on financial liabilities but will also need to touch on financial assets, especially in relation to derivatives and hedg- ing transactions. The present position with respect to accounting for financial instruments can best be described as ‘messy’. The situation as this book went to press was that the ASB had issued FRED 30 as the forerunner of two possible standards, Financial Instruments: Disclosure and Presentation and Financial Instruments: Measurement. The messiness of the present position is that the proposed standards are based on proposed amended versions of two International Standards, IAS 32 Financial Instruments: Disclosure and Presentation, and IAS 39 Financial Instruments: Recognition and Measurement. Also, the implementation of some of the changes proposed in FRED 30 would require changes in UK company law. The proposed issue of the two new UK standards would lead to the withdrawal of two existing standards, FRS 4 Capital Instruments and FRS 13 Derivatives and other Financial Instruments: Disclosures. In the circumstances we feel it would best help readers if we divided the chapter into two parts. In the first, we will concentrate on the basic principles underlying the issue and discuss the current but soon to be discarded standards. We will in so doing take account of their likely demise, but we need to remember the incremental nature of the developments in accounting standards. It is increasingly difficult fully to understand an accounting standard if one does not have some knowledge of its predecessor or predecessors. In the second part of the chapter, we will outline the contents of FRED 30 and comment on the likely progress of the convergence programme. FRS 4 Capital Instruments FRS 4 was the first ASB standard to deal with the issue of accounting for liabilities 2 and, while it is has been announced that it will be withdrawn as part of the convergence programme it still provides a useful introduction to the issues surrounding accounting for financial liabilities, and some appreciation of its contents will greatly assist in under- standing the numerous developments that are currently taking place. The convergence programme is bringing about changes in classification and terminology in a number of areas and, in this case, the phrase capital instruments is being replaced by the broader term 2 Although SSAP 18 dealt with contingent liabilities. 178 Part 2 · Financial reporting in practice financial instruments, that includes both financial liabilities and financial assets. We will, for convenience, continue to use the term capital instruments in our discussion of FRS 4. It is instructive to start by considering the objective of FRS 4, which is: to ensure that financial statements provide a clear, coherent and consistent treatment of capital instruments, in particular as regards the classification of instruments as debt, non-equity shares or equity shares; that costs associated with capital instruments are dealt with in a manner con- sistent with their classification, and, for redeemable instruments, allocated to accounting periods on a fair basis over the period the instrument is in issue; and that financial statements provide relevant information concerning the nature and amount of the entity’s sources of finance and the associated costs, commitments and potential commitments. (Para. 1) The paragraph makes specific reference to classification, appropriate measurement and dis- closure but makes no mention of recognition. There is a brief discussion of recognition in FRS 5 Reporting the Substance of Transactions and the subject is covered in a little more depth in Chapter 5 of the Statement of Principles. We should start by defining the term capital instruments. All instruments that are issued by reporting entities which are a means of raising finance, including shares, debentures, loans and debt instruments, options and warrants that give the holder the right to subscribe for or obtain capital instruments. In the case of consoli- dated financial statements the term includes capital instruments issued by subsidiaries except those that are held by another member of the group included in the consolidation. (Para. 2) Another important definition is that of finance costs. These are: The difference between the net proceeds of an instrument and the total amount of the pay- ments (or other transfers of economic benefits) that the issuer may be required to make in respect of the instrument. (Para. 8) With these two definitions in mind the main points of FRS 4 can be summarised. Balance sheet presentation Capital instruments must be categorised into four groups for single companies and or six groups for consolidated financial statements as shown in Table 8.1. The period prior to the issue of FRS 4 had seen the issue of various hybrid forms of capi- tal instruments that seemed to combine elements of debt and equity. Examples of the hybrid securities are convertible bonds where holders are given the right to convert into equity shares at a favourable price at some future time. Often the terms are such that the conversion is virtually certain to occur and existing shareholders benefit from obtaining Table 8.1 Categorisation of capital instruments Analysed between Shareholders’ funds Equity interests Non-equity interests Liabilities Convertible liabilities Non-convertible liabilities Minority interests in Equity interests in subsidiaries Non-equity interests in subsidiaries subsidiaries Chapter 8 · Financial instruments 179 capital at a relatively low rate of interest until conversion, when their ownership interest in the company is diluted. 3 Because of their complexity, and the lack of a clear accounting standard, there was incon- sistency in treatment and opportunities, which were from time to time taken, to paint the balance sheet in a more favourable light than reality might otherwise have allowed. All other things being equal, the higher the level of debt relative to shareholders’ funds the higher the degree of risk, because failure to pay interest could lead to the insolvency of the company, whereas the failure to pay dividends would not have such a devastating effect. Similarly, from the point of view of equity shareholders, a high level of non-equity shares means that equity holders are subject to greater uncertainty in terms of their returns because of the prior claims of the non-equity holders. Hence the opportunity of painting the balance sheet in a rosy hue if there are possibilities that instruments which are essentially debt can be presented as part of shareholders’ funds, or if non-equity interests can be classified as part of equity shares. As will be seen, the provisions of FRS 4 are such as to ensure that if an instrument contains any element of debt it should be treated as debt or, if the instrument is properly part of shareholders’ funds, then, if the instrument contains any trace of non-equity, it should be recorded as non-equity. Allocation of finance costs Finance costs associated with liabilities and shares, other than equity shares, should be allo- cated to accounting periods at a constant rate on the carrying amount. This is the actuarial method that is illustrated in the examples that follow. Initially capital instruments should be recorded at the net amount of the issue proceeds and only the direct costs incurred in con- nection with the issue of the instruments should be deducted from the proceeds in arriving at this net amount. The finance cost for the period is added to the carrying amount and pay- ments deducted from it. Thus, as will be seen, the carrying figure in the balance sheet may not be the same as the nominal value of the liability, but in the case of redeemable instru- ments this would result in the carrying amount at the time of redemption being equal to the amount payable at that time. Gains and losses will only occur on purchase or early redemp- tion and the standard specifies clearly how these should be treated. Gains and losses arising on the repurchase or early settlement of debt should be recognised in the profit and loss account in the period during which the repurchase or early settlement is made. (FRS 4, Para. 32) Accrued finance costs, to the extent that they will be paid in the next period, may be included with accruals, but even if this option is exercised, the accrual must be included in the carrying value for the purpose of calculating the finance costs and any gains or losses on repurchase or early settlement (FRS 4, Para. 30). In some cases the amount payable on the debt may be contingent on uncertain future events such as changes in a price index. Such events should not be anticipated and the finance costs and carrying amount should only be adjusted when the event occurs (FRS 4, Para. 31). 3 For an introduction to these hybrid forms of financial instruments, readers are referred to D.J. Tonkin and L.C.L. Skerratt (eds), Financial Reporting 1988–1989, ICAEW, 1989: chapter entitled ‘Complex Capital Issues’, by B.L. Worth and R.A. Derwent; and L.C.L. Skerratt and D.J. Tonkin (eds), Financial Reporting 1989–1990, ICAEW, 1989: chapter entitled ‘Complex Capital Issues’. 180 Part 2 · Financial reporting in practice We shall illustrate both the actuarial method specified in FRS 4 and the conflict between the provisions of the standard and the more economically illiterate aspects of company legis- lation by considering the example of the issue of three hypothetical debentures under terms that look more different than they actually are. Let us consider three issues of debentures, each with a nominal value of £100 and each for a five-year period. (a) Debenture A carries a coupon rate of 20 per cent per annum: it is to be issued and redeemed at par. (b) Debenture B carries a coupon rate of 16 per cent per annum: it is to be issued at a discount of £12, at a price of £88, and is to be redeemed at par. (c) Debenture C carries a coupon rate of 18 per cent per annum: it is to be issued at par but redeemed at a premium of £15 at £115. We shall assume that the interest on each debenture is payable annually at the end of each year and shall ignore taxation and transaction costs. The effective interest rate on Debenture A is 20 per cent and the terms of Debentures B and C have been chosen to produce identical effective interest rates of 20 per cent. In other words, if we discount the cash flows from and to the debenture holders, all these debentures produce a net present value (NPV) of zero at a 20 per cent discount rate (Table 8.2). In all cases the effective rate of interest, that is the cost of the finance, is 20 per cent, but whereas for Debenture A this is all paid in interest, for Debentures B and C the cost is partly paid as a difference between the redemption price and the issue price. Accounting for Debenture A poses no problems. The annual interest expense of £20 (20 per cent of £100) will be charged in the profit and loss account each year, while the liability will appear at the nominal value of the debentures, that is £100. Accounting for Debentures B and C does pose some problems and we will deal with each in turn. Example 8.1 Table 8.2 Net present values of debentures Debenture NPV at 20% A +100 – 20a 5 –100v 5 = +100 – 20(2.9906) – 100(0.4019) = +100 – 59.8 – 40.2 = 0 B +88 – 16a 5 – 100v 5 = +88 – 16(2.9906) – 100(0.4019) = +88 – 47.8 – 40.2 = 0 C +100 – 18a 5 – 115v 5 = +100 – 18(2.9906) – 115(0.4019) = +100 – 53.8 – 46.2 = 0 ٘ ٘ ٘ [...]... that the share price will increase considerably, pays 40 pence a share for the right to buy 1000 shares in October at £4.50 each, the strike price If, in October, the price of the shares exceeds £4.50 by a sufficient margin to cover the price paid for the option and other transaction costs, the purchaser of the option will gain because he or she could buy the shares at £4.50 and then sell them at the then... done if the warrant lapses without being exercised Should the amount initially subscribed to the warrant continue to be treated as part of share capital or be regarded as a gain by the company? The issue depends essentially on whether the warrant holders are regarded as sharing in the ownership of the company If they are so regarded then the benefit from the lapse in the warrant is not a gain to the company... In either case it is necessary to decide how to deal with the premium Not surprisingly we find that the law permits the write-off of this premium to share premium account but, for the reasons explained above, the authors are of the view that it should be charged to the profit and loss account over the life of the debentures Using the actuarial method the liabilities at the balance sheet dates and the. .. derivatives paint this rather charming scene before moving on to some pretty heavy mathematics The value of the option will constantly vary and will depend largely on two factors: ● ● the difference between the strike price and the current price of the share, the underlying price ; the volatility of the underlying price, which is usually derived from a formula that is related to the history of the share’s price... allocated to periods over the term of the debt at a constant rate on the carrying amount’.8 Using the actuarial method9 the liability is recorded at the present value of the cash flows discounted at the market rate of interest, which we have assumed to be 20 per cent The interest expense each year would be found by multiplying the present value of the cash flows at the start of the year by the effective interest... of the issue were treated as a liability The reason for this is that the total amount payable to the convertible debt holders, assuming no conversion, consists of a string of interest payments and the redemption price remains the same irrespective of the method of accounting used If the initial recorded value of the debt were smaller, as it would be if the proceeds of the issue were split, then the. .. not continue to carry the risk for the whole of the time it takes to grow the crop, as the futures contract is likely to be traded frequently as different views are formed as to the likely price Options differ from futures and swaps in that they involve the payment by one of the parties of a premium The importance of a premium is that it allows the holder not to go ahead with the transaction if he... of hedging or financial operation are known before disclosing the results The fair value approach does seem more appropriate for the financial trading company whose rationale is to live, or die, through its financial activities than it is for other companies whose financial activities are to support their main business Thus there are those who favour a dual regime using different bases for different... how the total finance cost of the preference shares should be allocated to the profit and loss account over their period of issue; where in the profit and loss account the finance cost should be reported; where the preference shares should be disclosed in the balance sheet; the nature of any supporting information which is required to be disclosed in the notes to the financial statements regarding the. .. 4 is based, would require us to show the cost as an appropriation of profit rather than an expense Issue costs The calculation of the constant rate of interest and the initial carrying value in the balance sheet depends upon the ‘net proceeds’ of the issue of the capital instruments The net proceeds are defined as: The fair value of the consideration received on the issue of a capital instrument after . essentially on whether the warrant holders are regarded as sharing in the ownership of the company. If they are so regarded then the benefit from the lapse in the warrant is not a gain to the company. to satisfying the requirements of FRS 4 this is the approach that is required in the USA 10 and by SSAP 21 Accounting for Leases and Hire Purchase Contracts when accounting for the obligation. premium account but, for the reasons explained above, the authors are of the view that it should be charged to the profit and loss account over the life of the debentures. Using the actuarial method the liabilities